Confidence Down, Earnings Up

This week the Conference Board reported that consumer confidence dropped 9.5
points to 87.3 in February; this was the lowest level since October of 2003.
The survey was also 5.2 points lowers than economists expected. The weakness
was broad based. The current situation component fell 6.3 to 73.1 and expectations
dropped 11 to 96.8. While almost every aspect of the survey showed that confidence
dropped in February, most of the components reverted back to the levels they
were at just a few months ago. Every other month, the Conference Board asks
respondents if they plan on taking a vacation within the next six months. Over
56% of respondents plan on taking a vacation over the next six-months. This
was the highest level ever recorded.

While, the ABC News Consumer Comfort Survey was unchanged this week, it had
a large 7 point drop to -13 last week. The ABC survey differs from the Conference
Board survey in that it asks about the respondent's personal financial situation
separately then how they feel about the economy. Last week, the personal finance
part dropped 4 points to 16 while the economy index fell 10 to -28. This week,
the economy component fell another four points, but the personal finance issue
recouped the two points it fell by last week. Given that consumers feel better
about their own situation than the economy at large is interesting. Add in
the fact that more people are planning vacations than ever before, shows that
something else might be happening. Plus, consumers are still spending money,
but more on that latter. It is highly likely that the decline in confidence
is associated with the news coverage of the Democratic candidates. All the
candidates are discussing the loss of jobs under the Bush presidency and lack
of any future job creation.

The Philadelphia Fed Survey was released last week. While the survey showed
some deterioration from the previous month, the manufacturing sector continued
to expand. The headline number fell 7.4 to 31.4, which is still above December's
level. The delivery component jumped 9.3 points to 7.2, highest since February
1995. Price paid jumped 8.4 to 43.7, highest since February 1995. Price received
jumped 9.5 points to 18.9, highest since January 1995. While the number of
employees index dropped, the average work week index soared 10.7 to 23.6, the
highest level since the survey started in 1968. This month's "special questions" focused
on inventory levels. It asked how much companies expected their inventory levels
to change over the next three and six months. Seventy percent said that inventory
levels would be +/- 5% in the next six months, while 57% thought so in six
months. Slightly more, 25.6%, thought their inventory levels would increase
more than 5% than thought would decline by more than 5%, 17.4%.

Retailers have been reporting stellar fourth quarter results over the past
two weeks. Home Depot fourth quarter same store sales advanced 7.6% compared
to last year. Part of the gain came from an easy comparison form the 6% decline
last year. Total sales increased 14.5%. Lowe's reported similar same store
sales growth of 7.3%, but because of its faster pace of opening new stores,
total revenue grew 28%. Department stores clearly lagged other retailers over
the past couple of years. This has changed rather decisively. Nordstrom's same
store sales increased 8.5% during the fourth quarter. Additionally, Nordstrom's
gross margin expanded 350 basis points from the year ago period to 36.8%. This
was also the highest margin in over ten years. It's SG&A (selling, general & administrative)
expense jumped due to an increase in incentive compensation related to the
strong sales results. Federated Department Stores also reported fourth quarter
earnings this week. While same store sales only increased 1.4% during the quarter,
the company raised its guidance for February sales to an increase of 7%-8%
from prior guidance of a 2%-3% increase. Gross margins also increased by over
100 basis points compared to last year.

The luxury end of the market performed very well in the fourth quarter and
has continued that momentum this year. Tiffany reported that it exceeded analysts'
earnings forecasts for the fourth quarter. Domestic same stores sale soared
17%, pushing total US sales up 20%. This was slightly higher than the 18% increase
in total sales. Japan continued to lag the rest of its markets. Japanese same
store sales declined 7% on a constant currency basis. It also said that purchases
of $50,000 or more had the biggest percentage gain. For those contemplating
getting engaged, Tiffany said that the price of the average diamond engagement
ring rose slightly to $9,500. The average price of sterling sliver jewelry
rose 14%. Also this week, Coach announced its same store sales are trending
in the high teens for the quarter-to-date versus guidance of 10%.

On the other end of the spectrum, both Wal-Mart and Target reported healthy
revenue and earnings gains last week. Sales at Wal-Mart increased 12% to $74
billion. Full year sales increased 11% to $256.3 billion. Looking at GDP figures
from 2002 (using purchasing power parity), Wal-Mart's revenue would rank number
31 in the world, just under Saudi Arabia and ahead of Columbia. Wal-Mart's
earnings rose 8.5% during the fourth quarter. Target posted stronger earnings
growth of 21%, while sales increased 11%. This week, both companies said February
sales were strong. Wal-Mart said its sales were near the high end of its expectations,
while Target said its sales were higher than its forecasts of 6% gains for
its combined discount and department stores.

On Wednesday, Starbucks reported that sales for the four-weeks that ended
February 22 increased 32%. A combination of new stores and an increase of 13%
in same store sales drove results. During the conference call, Howard Schultz,
chairman, said, "the current high level of revenue performance is not sustainable.
February 2004 benefited from strong post-holiday Starbucks Card redemptions
and an early start to our annual Brewing Event." During the holiday shopping
spree, several retailers commented on the strong gift card sales. This might
be part of the reasoning for the strong sales for January and February.

According to the ISCI/UBS Bank of Tokyo-Mitsubishi, same store sales increased
5.8% in January 2004 and are up 5.3% February month-to-date. The ISCI/UBS weekly
retail sales index increased 8.1% this week from a year ago. This was the strongest
year-over-year growth since early 1999. The Redbook/Instinet retail sales index
showed similar strength increasing to 5.6%, which is the fastest pace since
a peak in early 2002. Month-to-date same store sales have increased 5.1% over
February 2003.

The Dallas Morning News ran a story over the weekend discussing the local
car market that said Ford Motor Credit eased some of the lending restrictions
for the area. Evidently, Ford lowered lending activity by almost 31%, which
is about twice the 15.5% drop in vehicle sales. Similarly, GM's lending activity
dropped 19%, while sales fell almost 4%. There were several articles last year
that mentioned the Dallas auto market was one of weakest in the country, but
this was the first article to mention the tighter credit standards. The story
quoted Sam Pack, owner of several dealerships in the Dallas area, "Ford Credit
is potentially our greatest asset in the marketing of our products. Their performance
is absolutely critical to our success." Jerry Reynolds, owner of Prestige Ford,
echoed Mr. Packs comments, "If I'm going to get back to doing 700 to 800 units
a month, I've got to have Ford Credit with me."